Friday, February 09, 2007

The Not Making This Up Awards Part III: Announcing “The Patrick” Award for Worst Conference Call of the Season

Long time readers may feel a certain assuredness reading the title of this particular post, believing they already know what company—out of the thousands of possibilities—The Not Making This Up Awards is nominating for Worst Conference Call of the Season.

But the fact that we here at Not Making This Up have chosen to label our “Worst Conference Call” award “The Patrick” does not actually mean that Overstock.com has won “Worst Conference Call.”It’s just what we decided to call the thing.

After all, Overstock’s quarterly conference calls are like nothing else. To paraphrase the narrator in “A Christmas Story” when describing his father’s prowess in cursing, Overstock CEO Patrick Byrne works in non sequiturs the way Picasso worked in oils.

Take his wrap-up on this last quarter’s conference call: see if you can figure out what this means...

I have never heard Jason [Lindsey, Overstock President] so optimistic for the future actually. Okay, that is all we have to say. Thank you, owners, for sticking with us, those that have. We have been through tough times. '06 was a wipe out year. And there was a lot of pain, but a lot of it -- all the pain of tightening the belt and resizing our expense structure, we got our infrastructure fixed, but our expense structure still isn't there. But we have already taken steps at the end of the year and the first part of this year. We have made most of the decisions and made some of the changes. And there is -- we just have to carry them out in the next few months.But I actually have never heard Jason -- I'm just not going to comment on my own emotions, but those of you who know Jason, know you probably never heard him so optimistic. But we do have our work cut out for us still. But we do think we've gotten through the toughest part. Thank you all for your time. Bye-bye.

Why it matters that “Jason” has “never been so optimistic for the future” is beyond me—“Jason” is both President and Chief Operating Officer of the company, yet he failed to correctly answer a pretty basic question earlier in the call:

Jason Lindsey, President and COO: Bill asked three questions. The middle question I don't think we answered, which is where do you see the $5.5 million co-location termination payment. And Dave correct me if I'm wrong, that is in our G&A expenses, is that correct?

David Chidester, SVP Finance: It is actually in our technology expenses which relates to the co-location facility

As far as I can tell, even a cursory glance at the Overstock “L” statement (that’s a “P & L” without the “P”) would have revealed the likely placement of the one-time $5.5 million line-item to the most casual financial observer—but you be the judge:Overstock’s G&A expense rose $4.2 million year over year, from $11.6 million to $15.8 million; Overstock’s technology expense rose $15.4 million year over year, from $9.9 million to $25.3 million. Where would you guess the $5.5 million technology related co-location payment had been expensed?Still, the point here is not to belabor the latest public statements of a company whose operating problems are well known, and whose CEO has, lawsuits and conspiracy theories notwithstanding, taken the blame for those operating problems.The point here is to highlight a company whose fourth quarter conference call was one of the worst I have ever heard.

The company in question is a biotechnology company with a great product (Synagis, an anti-viral medication for premature infants) and a less-great product (FluMist, a nasal flu vaccine that has generally failed to meet anybody’s expectations since a much-ballyhooed introduction flopped a couple years back).

On the plus side, the company provided key IP for Gardisil, the new Merck HPV vaccine that is on track to be one of the blockbuster new products of the decade, so it should ride a fast-growing royalty stream from the HPV vaccine for years to come.

In the meantime, the company has been struggling to demonstrate to Wall Street’s Finest—almost uniformly skeptical since the FluMist debacle—that it has a worthwhile pipeline of new products, and held what is generally referred to as an “upbeat” analysts day almost exactly 60 days ago to showcase all the great things it was doing to extend the Synagis franchise, to get FluMist back on its metaphorical feet, and to hit two bucks a share in earnings in 2009.

On the surface, this company's Q4 numbers looked like a pretty good start towards that goal. According to the press release issued Wednesday morning,

[The company] also announced today that it had exceeded its earnings guidance for 2006 by reporting net earnings of $75 million, or $0.30 per diluted share, excluding share-based compensation expense. Including share-based compensation, [the company's] net earnings for 2006 were $49 million, or $0.20 per diluted share, as calculated in accordance with generally accepted accounting principles (GAAP).

The casual reader would be pleased especially with the fourth quarter, which by all appearances was a bang-up way to end the year:

It is only by reading further down, under “Gains on Sale of Asset and Investment Activities” do we find that the company—which, yes, is MedImmune—did not get to those chest-thumping numbers by dint of strong sales and reduced costs alone:

During the fourth quarter of 2006, MedImmune completed the sale of the CytoGam … product line, recognizing a gain of $49 million. Also during the fourth quarter of 2006, MedImmune realized gains of $42 million, after impairment charges of $6 million, primarily from the sale of two investments in its venture capital investment portfolio. For all of 2006, gains on investment activities totaled $34 million, net of impairment charges of $15 million.

One of Wall Street’s Finest—taken aback at the convoluted disclosure—later described the super-duper reported earnings as “almost fictional.” But that was later, after the conference call.

Another “almost fictional” number trumpeted in the press release was the U.S. revenue number for Synagis—an important and very profitable but highly seasonal drug under pressure from managed care providers—in the press release:

In the fourth quarter of 2006, worldwide sales of Synagis grew to $457 million from $439 million in the 2005 quarter, due primarily to an increase in reported sales for the U.S. to $403 million in the 2006 period from $379 million in 2005.

That U.S. Synagis number was right in line with Wall Street forecasts, although a little disappointing to the optimists. But in one of the greatest “oh, by the way” bombshells I’ve ever heard, the CFO disclosed on the conference call that $20 million of those so-called sales had actually been the result of a reversal in previous reserves “with respect to Medicaid rebates.”

Management also used the conference call to drop two other bombshells: first, that FluMist doses fell about 20% short of managements guidance at the analyst meeting 60 days ago; and that the introduction of Numax, a follow-up drug to Synagis on which management has placed great emphasis, has been pushed back following a meeting with the FDA.

Now, business is full of risks—and the medical business is probably full of bigger risks than any other. If a new drug isn’t toxic, and doesn’t kill patients, and actually does what the drug discoverer hopes it will do, there’s no telling whether the FDA will approve it, the government will reimburse it, and doctors will use it.

So there is no shame in a company—any company, but especially a biotech company—missing quarterly numbers and adjusting new product schedules without mentioning all the details in the earnings press release.

But MedImmune not only missed numbers and pushed out an important new product without discussing the details in the press release: on the ensuing conference call, the company limited Wall Street’s Finest to one question each and cut off the call after an hour, with only nine of Wall Street’s Finest able to ask questions.

I am not making that up.

For the record, I counted 12 questions from the floor, including three brief, apologetic follow-ups from those of Wall Street’s Finest who dared cross the “one question only” rule, before the CEO wrapped things up by noting that the hour was up.

By way of contrast, when Boston Scientific was missing numbers last fall, I counted 36 questions on their third-quarter conference call, from ten analysts with no limits on their questions or their follow-up questions.

As I said, there is no shame in a company missing numbers.

But companies that do miss numbers, or push out new product releases 60 days after reaffirming those product releases, or fail to highlight non-recurring gains in their earnings release—or all three, as in this case—generally spend the time to take all questions, in public, however they hurt, and answer them.

This award—“The Patrick”—is named for the CEO of Overstock.com, whose conference calls some find as unintentionally amusing as a grade-school production of “Fiddler on the Roof.” But I will give Patrick Byrne one thing: he takes questions on his calls, good, bad, ugly, from Wall Street’s Finest, no holds barred, as MedImmune did not.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

I hope you can see from my posts here that I have made no excuses for my vile criminal past. I have tried to teach others the lessons of my own criminal actions.

The main pillar of our great capitalist economic system is the integrity of financial information.

It is very troubling when a public corporation such as Overstock.com has a Director of Social Media who “in his spare time” runs a smear web site (anitsocialmedia.net) whose main purpose is to attacks critics of the actions of Patrick Byrne the CEO of Overstock.com and blunt inquiry into Overstock.com.

While Patrick Byrne AKA Hannibal has written “Overstock and I have precisely 0 to do with AntiSocialMedia” the barriers are flimsy at best. Judd Bagley’s spare time can in some cases be defined as “lunch time” or “days off” during normal week day business hours at Overstock.com as his posts appear on message boards and blogs during that time frame. Patrick Byrne has publicly suggested to others on the Investor Village Message Board to read Judd Bagley’s web site and has admitted to discussing the content of the web site with Judd Bagley in a post on the Investor Village message board. Judd Bagley admits to using multiple anonymous aliases on message boards. He discusses the use of “strategic messaging.” Perhaps this is what Patrick Byrne means by “hijack the discourse.”

If Overstock.com and Patrick Byrne is using Judd Bagley and antisocialmedia.net as a surrogate to change the discourse into Overstock.com and the actions of Patrick Byrne, Judd Bagley, and perhaps others, than this is a very troubling issue for the regulators and others to consider.

Respectfully,

Sam E. Antar (former Crazy Eddie CFO & convicted felon)

PS: Jeff, I am very serious about this. Others are serious about it too.